Governments and local councils would be much better off making business cases for public projects such as the $650 million Kingsford Smith Drive upgrade public before they commit to them, so they are tested by the critics and the politicians are sure they are not exposed to later criticism. Brisbane City Council has just learned this lesson, as it appears the business case for the KSD upgrade provides only modest support for the project, with travel time savings of only one minute per trip and a benefit-cost ratio of only 1.36, taking into account the full range of possible economic benefits (see Brisbane Times coverage). Given the uncertainty around cost and benefit estimates for public projects, this benefit-cost ratio does not provide a lot of comfort that the project stacks up.
What we really need to see is the full sensitivity analysis for the project, which tests how robust the benefit-cost ratio is to variations in key assumptions (e.g. capital expenditure, travel time savings). Is the benefit-cost ratio less than one in some scenarios? It possibly would be. We really need to see the sensitivity analysis to know how comfortable we can be with the project going ahead.
It would be a cause for concern if the business case did not contain a sensitivity analysis. The Queensland Government’s Project Assessment Framework guidelines on cost-benefit analysis are instructive on the importance of sensitivity analysis (p. 7):
A range of factors can lead to significant variations in costs
and benefits of a project from the levels assumed in the
financial and economic analysis of a project option.
Project analysts can address this uncertainty by
undertaking a sensitivity analysis, which enables an
examination of how sensitive the financial and economic
outcomes are to specific assumptions in the evaluation.
The analysis would be focused on the key variable or else
those that are so uncertain that their variation could upset
the project’s outcome.